Financing a small business can be a tricky, and sometimes the need for a loan comes at a time when your small business’s survival and growth depends on it. It’s therefore crucial for small business owners to learn about the ins and outs of loan applications and get organized ahead of time, so that when the time comes, you’re prepared to put forth the best application possible. There can be a lot of misinformation about what is needed to secure a loan if you’re a small business owner, but we’ve listed some of the most common myths below—and the real truth behind them.
Myth: Your loan application can have a broad scope.
Fact: Technically true, but it’s not the best approach.
Having a vague notion of what your small business loan will be used for can sometimes work, the vast majority of loans require you to have a stated purpose that the loan will be used for. Financial institutions have the ability to require full repayment if a loan isn’t used for what is stated in the application. The purpose can also help you determine the right kind of financing to apply for—for example, a long-term loan with a fixed rate may be better for businesses in the midst of expansive growth, but opening a credit card may make more sense for everyday purchases.
Myth: Applying for a loan doesn’t require much prep work.
Fact: It very much does!
Being prepared and organized ahead of time is the best thing you can do to ensure the success of your loan application. There are many documents you’ll need to gather, including your tax returns (for many banks this means at least two fiscal years), articles of incorporation, trade name association, and DBA (doing business as) paperwork.
It’s also crucial to ensure any ownership issues are clarified and documented before applying. This is particularly important for small businesses with multiple owners, such as LLCs, and includes formalized documentation outlining who has ownership of the company and its assets.
Myth: It’s a small business loan, so your personal financial position isn’t a factor.
Fact: Everything about your small business, including your personal financial situation, is relevant during the loan process.
If you are the sole proprietor of your business, financial institutions will treat you as an individual applying for a loan—even if you apply on behalf of your business. In addition, even if you are not the sole proprietor, as an applicant you will need to sign a personal guarantee. This holds you accountable for the loan, even if the business fails.
What all of this means is that your personal finances can have a big impact on your ability to secure a loan or other financing for your small business. Make sure you research your credit score, as well as your debt-to-income ratio and your loan-to-value ratio (LTV), ahead of applying for any financing. Credit scores are easy to access for free, and there are online tools available to help you calculate debt-to-income and LTV.
Myth: When it comes to small businesses, every bank is the same.
Fact: Every small business is different, and deserves a financial partner that understands their unique needs.
Take the time to research the different institutions you’re considering partnering with, including what their rates and policies are. A little extra research can go a long way to ensuring your bank is an actual partner who understands your business’s needs. For example, if your business’s hours and/or your schedule mean it’s difficult for you to go to a brick-and-mortar location, a bank that requires you to be physically present for a loan application is probably not for you. Similarly, it’s best for small business owners to steer clear of banks that are not transparent about their fees and rates—by not seeing these numbers upfront, you could end up being charged unexpectedly for things like application fees or other unnecessary costs.
Now that you’ve taken a look at the truth behind the most frequently heard myths related to small business loans, you’ll be better prepared to help your business succeed and secure the financing you need, when you need it.
Harry Gunsallus ([email protected]) serves as the Chief Operating Officer for Owners Bank. He oversees digital strategy, builds and maintains Fintech partnerships and develops an integrated and compelling suite of products and services to support Owners Bank. He is a leading subject matter expert in helping financial institutions grow through innovation and has held other senior IT, operations, innovation and product development positions throughout his distinguished career in the financial services industry.